MSME (Micro, Small, and Medium Enterprise) was introduced as a sector by GoI in agreement with the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006. This sector is managed under the Ministry of MSME (MoMSME) and is entities engaged in the production, manufacturing, processing or preservation of goods and commodities.
The MSME sector is a strong pillar of the Indian economy and has contributed significantly to the economic and social development of the country. They provide local employment and operate as complementary units to large industries, enabling sustenance and livelihood, for the population at large which is very critical for the overall growth of the nation.
However, this sector has always come up short whenever there were considerations of policy reforms, fiscal benefits, or safety from market volatility, albeit its prominent position as a significant economic driver. For a very long time, the MSME sector was a cash-driven industry owing to its unique credit needs to maintain adequate liquidity for business operations.
Now traditional financial institutions could not offer credit access to these MSMEs largely due to traditional underwriting methods, over-emphasis on formal data and documentation, and manual process-heavy methodology which were developed for large ticket-size loans. Moreover, nearly half of the MSMEs are either new-to-credit or have limited credit data.
As per the World Bank estimate, the MSME credit gap in India stands at USD 375Bn and 95% of this addressable credit demand comes from micro and small enterprises. So invariably, MSMEs rely on informal sources such as local money lenders for their cash requirements, at exorbitant rates of interest, or fall prey to dubious loan schemes.
But these are not reliable or sustainable credit sources, so the MSME sector took a major blow during the pandemic lockdown. Since a substantial part of MSME, business transactions were cash-driven, operated in an unorganized manner, and lacked any grievance support system in place, many shut shop with the unexpected onset of Covid-19.
Most MSMEs faced a daunting challenge to secure credit access and even struggled to cover basic office expenses. On the other hand, traditional lenders either leveraged the situation with higher interest rates or became hesitant to offer loans due to fear of non-payment.
The resurgence of the MSME sector needed a pragmatic approach with a longer vision and a new business environment. The Pandemic forced the need for digital lending which has been a boon for the MSME sector. The digitally transforming India has led to the advent of many entrepreneurial ventures from the non-metro markets, or what we call the real Bharat, that accounts today for over 1150M and $1T GDP.
This digital adoption of businesses (80-90% of MSME owners are smartphone users) paved way for changes in payments and regulatory ecosystem, and for fintech and new-age lenders to step in and help in bridging the credit gap for small entrepreneurs.
It became necessary for MSMEs to not only have access to adequate capital but also have an eco-system that augmented their growth and understanding of dealing with the digital economy, as many of the MSMEs are new to a digital economy.
New-age Fintech players realize that the MSME segment holds great potential, only if data and technology are smartly leveraged to serve them. Use of new-age technology allows fintechs to offer quicker and improved onboarding process, safer credit underwriting, better fraud detection, credit monitoring and have a superior level of security and compliance.
Lenders can source huge backhand data on their borrowers that can provide critical information such as the financial need pattern of the business, consumer financial behavior, and intent to repay. Using these data points lenders curate customized solutions best suited for the business, manage risk mitigation and reduce the burden of delinquencies. Moreover, loans from new-age lenders help new-to-credit MSMEs to create a good bureau report which will help them ahead to facilitate larger loans.
The GoI is also in the process of some milestone changes to encourage the MSME sector through fiscal and policy regulations. It launched the “MSME Innovative” Scheme to help MSMEs scale up through financial and technical assistance and business support, marketed by the MSME Ministry. Such initiatives if implemented on a large will create a more robust industry.
Indian MSMEs have now embraced digital infrastructure and prefer digital payments over cash, as reports indicate that 72% of payments are made digitally compared to 28% of cash transactions. Digital lending platforms are critical to closing the MSME credit gap in India and unlocking the true potential of the sector. The big vision of India to be a $ 5 trillion economy needs a resurgent, digital, vibrant, and innovation-driven MSME sector.
